The S&P 500 advanced 0.6% on Thursday with volume not yet published at the time of posting this blog. If the S&P 500 were to decline about 14 points on Friday (-0.7%) our stop-loss algorithm could trigger and change our automated market forecast to an uncertain trend.

Subjective Comments:

We are cautiously changing our subjective investment recommendation. We explain why and offer specific investment advice in the following paragraphs.

The US M2 money supply and banking reserves data was published Thursday. Money supply growth continues to accelerate over the past 7 weeks following a 3-week decline at the beginning of the year. At the present growth rate of 13% annualized (over the past 7 weeks), or a rate of 7.6% annualized (over the past 23 weeks), M2 is experiencing accelerated growth over the prior periods. According to Austrian Business Cycle Theory (ABCT), this will cause a bubble-boom in US markets and the economy. If Austrian True Money Supply is used instead and the past 2 years are considered, the past 6 months has a slightly accelerated rate compared to the prior 18 months. All of this points to a continued bubble-boom. There are three reasons for some caution, however. First is that the accelerated growth rates are not yet exceptionally stronger than the prior growth. ABCT requires accelerated growth. That is what is happening, but the acceleration is not yet much faster than prior periods. The second reason for caution comes from the Fed’s announcement of another taper, meaning the rate of money printing by the Fed will slow. The third reason for caution comes from the US banking required reserves which are unchanged over the past 6 weeks. There was accelerated lending for the three months of November, December and January, but since the end of January net lending has leveled off as indicated by the unchanged required reserves. There are three ways the US money supply can grow:

The Fed is still printing, but they are “tapering”. For the past 6 weeks the Fed has stopped lending. Russia recently threatened to dump US dollars, which would have caused them to come back to the US, but so far they have not followed through on that threat. So, right now, the three sources that can accelerate the money supply growth rate are not doing what is necessary to sustain the current accelerated growth rate.

Here is what we suggest given the state of the US money supply. There has now been sufficient growth that any market crash has now been pushed at least several weeks into the future. Should the US money supply growth slow or even go negative (deflation), there will be time to react to such a change and exit the market. Investing some money to grow with US markets has much less risk now. If banks resume aggressive lending then the money supply will continue to grow and a bubble-boom could continue. How long and how high the bubble will grow is unknown. If you choose to invest in US markets now, but sure to keep close track of the weekly updates of the US money supply for any changes in the growth rate.

Additionally, continue to avoid all bonds. Price inflation is going to accelerate and this will drive bond prices down. It appears less and less likely the US will resort to violence over the Crimean annexation, but the stupidity of US foreign policy could still antagonize the Russians and cause them to dump dollar holdings. This would flood the bond market with a huge supply and push bond prices down further. For all these reasons continue to avoid all bonds. Price inflation hedges remain a good long-term investment.

We are changing our subjective investment recommendation to “Invest for Growth”, but we don’t suggest going all-in all at once. Instead begin to accumulate positions in investments that grow with US markets. If the US money supply continues to accelerate, continue to accumulate positions. It will be two weeks before the next banking reserve data is available and about three to four weeks before the Fed taper starts to take effect. It will be another 6 weeks before it is clear if banks will accelerate lending and keep the bubble-boom going. Slow accumulation over the next 6 weeks will limit downside exposure and position for continued growth that could occur.

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